Expenses Guidelines for Sole Traders & Partnerships

It’s a pretty basic question: “What can I claim for when I work from home?” However, the answer is straightforward only when you recognise the variations in practice.

The self-employed are subject to very different rules compared to employees, and not all employees are treated equally!

Motive & Duality

Some expenses have a dual purpose, i.e. both an element of business and private use.

In calculating the profits of a trade, no deduction is allowed for:

(a) expenses not incurred “wholly and exclusively for the purposes of the trade”, or
(b) losses not connected with or arising out of the trade.

If an expense is incurred for more than one purpose (business & private element), this does not stop you from claiming an identifiable amount or proportion of the expense which is incurred “wholly & exclusively for the purpose of trade”

This means that it is OK to claim a great deal more expenses in relation to self-employed home working, than you might have contemplated in the past.

For example, you may now claim a proportion of telephone fixed line rental on a domestic phone, and a proportion of exterior house repairs. In fact almost every self -employed person will be able to claim something, even if it is only £2 per week! The key to claiming expenses is to ensure that they are reasonable in relation to the type of home-office user. This means that the first thing to do is determine exactly how and where you work at home…

Home-worker: ‘User Types’

To help keep things simple we have outlined five basic types of self-employed home worker:

1. The ‘kitchen table’ worker – no distinct office as such, but settles down at the kitchen table once a weekto write invoices and occasionally write up the books
2. The ‘part-time home PC user’ – pushes the children off the PC every other night to type invoices, check email, and maintain basic books and records.
3. The ‘serious PC’ user – has a PC in its own corner of a room on a desk. Not an office as such, but a clearly defined space.
4. The ‘in-home office’ – has partly converted a bedroom into an office, which is mainly, but probably not exclusively used for business – it may store private belongings for instance.
5. The ‘dedicated office’ – the office is just that, possibly a converted garage, room or loft, or it may be free standing in the garden. This office may/ may not be used exclusively for business. Any private use is incidental/occasional, perhaps limited to storing private records.

Points of Note

The majority of user types 1 to 3 will be unlikely to make many high claims for use of home, as the proportion of their business use is likely to be very low compared to the private use.
User types 1 to 4 will not encounter any capital gains problems on the sale of their main residence, as they are not using any part of their home exclusively.
As user type 5’s office may be used exclusively for business, it can therefore be classes as a business asset, and so benefit from capital gains tax (CGT) reliefs.

Type of expense and method of apportionment

The following list of expenses suggests appropriate methods of apportionment. It is much more accurate if you can work out your exact electricity use, but this may be impractical to do so, in which case you need to work out a % use.

If you are working out a % use for lighting and heating, then it may be practical to use the same ratio for other costs, but, this depends on the type of user and the equipment used.

Expenses broadly fall into two categories, fixed costs and running costs. Fixed costs will have to be apportioned, whilst running costs should be calculated by usage.

Light and heat: Apportion by metered use. Failing that, by proportion based on square metre of room space use, or by number of rooms. You could also factor in the % use on an hourly basis.

Telephone (including line rental): Apportion by call time (incoming and outgoing).

Rent: Apportion by square metre/room and % use.

Type of expense and method of apportionment (continued)

Council tax: Apportion as per rent

Mortgage interest: As per rent, unless part of mortgage relates to part used exclusively for business, for instance, if you got a ‘top -up’ to convert the garage into an office

Insurance: As per rent, apportion part of the general household policy, and claim all of a dedicated business policy as a normal business expense

Repairs to business equipment: All allowable, restrict if private use

Capital allowances on business equipment, on costs of fixtures for home office: Restrict if private use

ISP / Broadband costs – by usage time, or as per telephone, or per other costs

Cleaning, re-decoration and repairs, both internal & external: Apportion as per rent

Clothing if uniform, required for work or protective clothing: You cannot claim for clothing that ’could’ be worn as normal every day wear. See notes for guidance*

*Clothing expenses are always questioned. These guidelines will assist:
1. Is it a uniform? If you have to buy a uniform that identifies clearly what you do, you can put that into your accounts and claim tax relief on it. An example would be a uniform for a self-employed nurse. You can’t claim tax relief on any clothing other than your uniform, such as shoes or stockings.
2. Is it protective clothing? You are allowed to include the cost of protective clothing, for example steel toe-capped boots and a hard hat. What you can’t include are jeans and a shirt to wear on site, as those could be worn as part of an “everyday wardrobe”.

Notes on apportionment of expenses for office at home

It is sensible to apportion:

By number of rooms (do not count halls, lavatories, small bathrooms, pantries)

By sq. metre, or floor area, if you have the measurements to hand

By electric meter,

Example 1:

Angela writes up her business records at home. She uses a room solely for business use for a short period each week. She estimates that £104 covers the cost of the proportion of the
establishment costs, plus the electricity for heating and lighting.

Although the claim for £104 is obviously an estimate of £2 per week, the claim is small and reflects the facts
of the case. It is a reasonable estimate of the expense incurred. No enquiries are necessary if it’s possible to make test readings with all other household appliances switched off.

By water meter, if metered (not if unmetered)

By % of actual time in use

Example 2:

Chris is an author working from home. She uses her living room from 8am to 12am. During the evening, from 6pm until 10pm it is used by her family.
The room used represents 10% of the area of the house.
The fixed costs, including cleaning, insurance, Council Tax and mortgage interest, etc – total £6,600. A tenth of the fixed establishment costs is £660. For the purposes of fixed costs, one sixth
(4/24) of the use by time is for business, so Chris claims £110.

She uses electricity for heating, lighting and to power her computer, which costs £1,500 per annum. Chris considers an apportionment of these costs by time and area. A tenth of the costs are £150 and half of these costs by time (4/8) relate to business use, she claims £75.

She also uses the telephone to connect to the internet for research purposes. Her itemised telephone bill shows that a third of the calls made are business calls. She can claim the cost of those calls plus a third of the standing charge.

Example 3:

Chris has some work done on the house. She has the exterior painted and at the same time has the dining room re-decorated. What, if anything, can she claim as a deduction?

The exterior painting is a general household cost. She can claim a proportion based on business use. Chris does not use her dining room for business purposes. The cost of redecorating the dining room is not an allowable expense.

Example 4:

Gordon, an architect, dedicates a room solely for use as his office between 9am – 5pm daily. The room contains a workstation, office furniture and storage for his drawings. He uses the room for
an average of four hours each day, though often this is spread over his working eight hour day as he has a number of regular site visits to make. In addition it is not uncommon for Gordon to accommodate clients in his office to discuss plans, outside of normal hours. The room is available for domestic use outside of business hours and his family regularly make use of the room for around two hours each evening.

After apportioning costs by reference to the number of rooms in the house, Gordon calculates the room uses £300 of variable costs (electric and oil) and £600 of fixed costs (council tax, mortgage interest, insurance). In apportioning these costs by time Gordon claims £680 in total, made up of 4/6 of variable
costs (£200) and 8/10 of fixed costs (£480).

Other Expenses

Subsistence & Business Entertainment

Staff Entertainment – up to £150 per annum per person
Subsistence
Client Entertainment is not allowable, but if it is more than 5
miles from regular place of work and unplanned – ‘your’ portion
can be classed as subsistence.

Gifts

Give logoed gifts advertising your business
Allowed to claim for up to £75 per annum

Health Policies

Life Policies
Income replacement
Water rates
Cannot be claimed for if there is no business use. A business with employees will need water.

Charitable Giving

Donations are given through the gift aid scheme as an individual and therefore not allowed .

Capital Gains Tax Considerations

At a time of rapid house price inflation there was a distinct possibility that, upon the sale of a main residence, a ‘capital gain’ could arise on any part of the home which had been claimed as in-use
exclusively for business purposes. Therefore if you claimed that 1/5th of your home was used exclusively for business, then 1/5 of any capital gain on disposal would be from the disposal of an asset not covered by Principal Private Residence relief.

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Disclaimer:- The information contained herein is given by way of general guidance only and no action should be taken solely on the basis of the information contained herein. The Avanti Group (UK) Ltd will be pleased to provide further guidance on the issues, and how they might affect you. No liability is accepted by the firm for any action taken without seeking appropriate professional advice

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